ASIA CRUDE OUTLOOK: Saudi May Lead Price Hikes, Volume Cuts

SINGAPORE --Middle East crude oil producers led by Saudi Arabia are expected to raise official selling prices next week as a prelude to volume reductions, potentially keeping Asian refiners on the defensive.

Spot valuations on the region's high-sulfur or sour grades have strengthened despite the recent drop in outright oil prices, so much so that benchmark Dubai briefly climbed Friday to a premium to Brent, the bellwether for Atlantic basin low-sulfur or sweet crude.

That's coming on the back of strong margins for fuel oil - the residual product Middle East crude is prized for - and if producers were to cut output, the market could rise further.

Saudi Arabia, along with Iran, Kuwait and Qatar, is expected to announce supply cuts, in line with a pledge by the Organization of Petroleum Exporting Countries to shore up sagging oil prices and defend revenues.

Since the Middle East-dominated group decided Dec. 17 to reduce output by 2.2 million barrels a day, its largest cutback on record, only the U.A.E. has informed Asian customers of reduced shipments for February.

Iraq, the sixth regional OPEC member, isn't bound by output quotas.

The U.A.E.'s Abu Dhabi National Oil Co., or Adnoc, said Dec. 25 it will slash shipments under term contracts by 10%-15%, a move that immediately lifted differentials on spot cargoes.

Adnoc's flagship Murban crude, while offering a lower yield of fuel oil than the heavier grades, rose this week above the OSP for February - the first premium in about six months.

"No one's talking about March yet but it looks fairly supported," said a Singapore-based trading house official.

Oil traders may get their first clues of buying interest for March supplies when India's ONGC Videsh Ltd., a unit of Oil and Natural Gas Corp. (500312.BY), closes its regular spot tender Monday to sell a cargo of Russian Sokol crude loading Mar. 14.

While the Russian grade is light sweet, its quality is comparable with Murban and often draws bids from Japan - the leading market for Abu Dhabi crude.

The tender for 700,000 barrels of Sokol will be awarded Tuesday, according to a tender document.

   Price Cuts Before Volume Cuts 

Before the Sokol tender outcome, however, Asian refiners may be slapped with a likely price hike from Saudi Arabian Oil Co. or Saudi Aramco.

Last month the firm surprised customers after it raised January OSPs for supply to Asia, the primary market, while cutting most prices applied to the U.S. and Europe.

The move fanned speculation Saudi Aramco may be laying the groundwork for a corresponding adjustment in supply; within days, the company cut January term volumes by 7%-10%.

This scenario could be repeated as early as this weekend, with Adnoc, which sets prices one month retroactively, also likely to step in with OSPs, traders said.

Even though Asian refiners plan to process less crude in the first quarter, many remain on the lookout for short-term profits such as those offered currently by the fuel oil market.

With Asia's reference crack spread, calculated as the discount of Singapore high-sulfur fuel oil swaps to Dubai crude, holding strong around $7.70 a barrel, refiners are still keen to lay their hands on sour crude.

In the coming days, however, those hopes could be dashed by a combination of higher prices and reduced supply.

-By Yee Kai Pin, Dow Jones Newswires; +65-6415-4062; kai-pin.yee@dowjones.com

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